Cannabis stocks have seen a resurgence over the last month thanks to recent moves that point toward the U.S. reclassifying the drug and allowing more open banking for cannabis companies. In the long term, cannabis stocks, while risky, offer some of the best possibilities for growth.
Only six states in the U.S. don't allow cannabis sales in any form: South Carolina, Idaho, Kansas, North Carolina, South Dakota, and Wyoming. The number of states allowing both medicinal and adult-use sales has grown to 24. Federal decriminalization probably would make the sector more profitable. One report by Fortune Business Insights puts the compound annual growth rate (CAGR) for the U.S. cannabis market at 34% between 2023 and 2030.
U.S. cannabis sales are forecast to come in at $33 billion this year and rise to $57 billion by 2028, according to MJBizDaily. If the Drug Enforcement Administration, at the request of the Department of Health and Human Services, reclassifies cannabis as a Schedule III drug rather than a Schedule I substance as it is currently listed, it will open the door to lower income taxes for cannabis companies.
Currently, under Section 280E of the Internal Revenue Code, the IRS prohibits cannabis companies from taking the standard deductions for business operating expenses. The rescheduling could also potentially allow cannabis to be shipped over state lines, meaning better economies of scale for large multistate operators (MSOs).
TerrAscend (TRSSF -3.85%)has benefitted from a resurgence in interest in cannabis stocks as did Cresco Labs (CRLBF -1.23%) temporarily. TerrAscend shares are up about 63% this year while Cresco, though down about 3%, was up almost 50% at one point last month. Looking at the long term, though, which is the better growth stock for investors? Let's see.
Cresco has its advantages
Cresco recently opened its 71st retail location, and as of the second quarter, it was the sixth-largest MSO in terms of revenue. The company operates in 10 states and has the leading market share in Illinois, Massachusetts, and Pennsylvania. It also has a strong wholesale business, and its brands (Cresco, High Supply, FloraCal, Good News, Wonder Wellness Co., Mindy's, and Remedi) are sold in thousands of dispensaries.
That size gives the company leverage, and if cannabis is decriminalized federally, some of the expenses dragging the company down, especially involving taxes and the ability to transport product from one state to another, would instead become advantages as it would be in a good position to see greater economies of scale.
The company has said it is undergoing a reorganization to improve margins by focusing on more profitable states, and that would be a step in the right direction. In July, the company also got out of its merger agreement with Columbia Care and agreed to terminate a deal with rapper Sean "Diddy" Combs.
In the second quarter, revenue was reported as $198 million, up 2% sequentially but down 9% year over year. It also reported a net loss of $43.5 million, including $22 million in impairment charges, compared to a net loss of $27.8 million in the previous quarter and $8.2 million in the same period last year.
One of the bigger concerns for the company is that its net debt of $565.1 million will slow its ability to grow and could take the company much longer to become profitable.
TerrAscend appears to be ramping up growth
TerrAscend is a much smaller company, with 37 retail outlets across five states: California, Michigan, Pennsylvania, Maryland, and New Jersey. The company became the first U.S. cannabis company to trade on the Toronto Stock Exchange in July, broadening its ability to raise funds.
TerrAscend is showing more growth as of late, with seven consecutive quarters of increased revenue. In the second quarter, the company reported revenue of $72.1 million, up 3.9% sequentially and 12.7% year over year. Additionally, the company narrowed its net loss to $12.9 million compared to a loss of $19.2 million in the prior quarter and a loss of $16.9 million in the same period last year.
TerrAscend also raised its annual forecast to show it expected $317 million in revenue and $63 million in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). That's up from its earlier estimates of at least $305 million in revenue and adjusted EBITDA of $58 million. And it's a big jump from the $247.8 million in revenue and $38.8 million in adjusted EBITDA it reported in 2022. An even bigger deal was that the company said it expects to have positive free cash flow from continuing operations in the second half of 2023.
As of the second quarter, the company's net debt was $190 million, a good deal less than Cresco, and TerrAscend's debt to EBITDA ratio is 0.814, compared to 8.395 for Cresco. That's because the company has paid down its debt to about $185 million. However, that number has likely ticked up since it closed an $8.25 million purchase of Herbiculture on June 30 to give TerrAscend a total of four dispensaries in Maryland.
Of the two stocks, while Cresco certainly is bigger, TerrAscend has more potential for continued share and revenue growth. The company has said it expects 28% revenue growth this year, a rate near the top of the industry.
What I like is that TerrAscend has been able to increase revenue while staying focused on certain key markets and reducing its debt. Not all cannabis companies will survive over the next few years, but TerrAscend's financial strength puts it in a good position to gain market share and be ready for the coming boom.